The stock market has been rising almost nonstop for more than eight years now, and many investors think that we’re overdue for a bear market decline. Yet you can control your portfolio risk level by paying close attention to your asset allocation, and a conservative strategy that includes both stocks and bonds can be a great way to generate income. The Vanguard Wellesley Income Fund (NASDAQMUTFUND:VWINX) is a balanced fund has includes both stocks and bonds, and its emphasis on providing regular income for its shareholders gives it a lot more protection against a stock market crash than funds that concentrate solely on stocks. Although that makes the fund less than ideal for those with very long time horizons, it nevertheless serves a vital role for those approaching retirement or who expect to need their money sooner rather than later.
What is Vanguard Wellesley Income Fund’s objective?
The investment objective of the Vanguard Wellesley Income Fund is to provide long-term growth of income and a high and sustainable level of current income, along with moderate long-term capital appreciation. The order in which those goals are listed provides the list of priorities for the fund, with income clearly taking the commanding role.
To do so, Vanguard Wellesley has the right to use a broad range of investments. The fund can invest up to 25% of assets in foreign securities, and investing in derivatives is also permitted. Convertible securities, forward foreign currency exchange contracts, and collateralized mortgage obligations are just a few of the tools that Vanguard Wellesley has at its disposal. The fund retains latitude to depart from normal investment policies when necessary to support the best interest of shareholders.
What is Vanguard Wellesley’s asset allocation strategy?
In order to accomplish its investment objective, Vanguard Wellesley typically invests between 60% and 65% of its assets in investment-grade corporate bonds, U.S. Treasury bonds, and government agency bonds, as well as mortgage-backed securities. The remaining 35% to 40% of fund assets goes into the stock market, with the fund focusing on companies that have a history of paying above-average dividends or have expectations of making rising dividend payments in the future.
Currently, Vanguard Wellesley has concentrations in corporate bonds issued by industrial and financial companies, which make up more than 60% of the fund’s bond assets. Treasuries and agency bonds represent almost half of the remainder, and Vanguard Wellesley maintains an average effective maturity of between nine and 10 years.
On the stock side of the portfolio, the fund’s holdings are fairly evenly spread across most key sectors of the market. Financials, consumer staples, and information technology get the highest allocations at 14% to 15% each, but healthcare, energy, and industrials also have weightings of 10% or more. Individual holdings tend to be well-known leaders in their industries, again with an emphasis on dividend-producing securities.
How much does the fund cost?
Vanguard Wellesley Income charges a modest 0.22% expense ratio to investors in its regular investor-class fund. Admiral-class shares are also available for those who can invest a minimum of $50,000, and for them, expenses are even lower at 0.15%.
How much income does the fund provide?
Vanguard Wellesley’s current SEC yield is 2.78%. That reflects both interest payments from the bonds it holds in its portfolio and dividends from its stock holdings. Dividend distributions from the fund take place quarterly.
The fund also distributes capital gains when necessary on an annual basis. Last year, capital gains distributions amounted to more than a quarter’s worth of dividends, while in 2015, the distribution was equal to about nine months of dividends.
Is Vanguard Wellesley right for you?
Vanguard Wellesley’s conservative model has generated impressive returns over time, with average annual returns of almost 7% over the past 10 years, with less volatility than more stock-centered funds. However, the fund’s high allocation to bonds right now makes it vulnerable to interest rate increases, and that could create losses that many investors aren’t prepared to see. Coming off a 40-year bull market in bonds, the potential for capital losses on bond investments is very real, and that type of risk is one that many conservative investors won’t necessarily appreciate.
If you’re looking for a balanced fund with a bias toward bonds, then Vanguard Wellesley Income Fund offers a compelling portfolio at a low cost that’s appropriate for those with moderate-length time horizons. For younger investors, however, Vanguard Wellesley’s asset allocation is likely not aggressive enough to help you reach all of your long-term goals.